Taxation
Topic
IFRS 6 allows entities to adopt the standard for using accounting policies to explore and evaluate assets brought into effect before adopting IFRS. It was issued in December 2004 and applies to annual periods on or after 1 January 2006. Most of the fundamental entities in the sector use the approach based on ‘successful efforts’, where the costs incurred in acquiring, funding, and developing reserves are capitalized on a ‘field by field’ basis.
IFRS 6 allow sentities to continue using their existing accounting policies based on whether they comply with some policies like accounting policies and changes in accounting errors and estimates. The criteria for determining if a policy is reliable and relevant lie below:
● If it is relevant to the economic decision-making requirements.
● If it is reliable to the extent that the financial statements.
i. Offer faithful representations
ii. Depict economic substances of events, conditions, and transactions and not only their legal form
iii. Be free from bias or neutral
iv. Are prudent
v. Satisfy all material respects
Alterations brought about in an entity’s accounting policy for exploring and extracting assets can be done if the financial statements are less relevant and not more reliable or more relevant and less reliable to the requirements of the economic decision-makers.
IFRS 6 has an extremely narrow scope, and its costs can be capitalized after the entity has obtained legal rights to discover a specific area but before the extraction demonstration as both technically feasible and commercially viable. So, costs incurred before exploring legal rights have been obtained are subject to profit or loss expenses. Once technical and commercial viability has been demonstrated, IAS 16 or 38 would affect costs.
The capitalized expenditure includes the following factors:
1. Trenching
2. Sampling
3. Exploratory drilling
4. Acquisition of exploratory rights
5. Geological , geophysical , geochemical, and topographical studies
6. Activities linked to the examination of practicability and economic viability of exploiting a mineral reserves
The method of impairment determines the exploration or evaluation of assets. The tests to indicate its impairment are as follows:
● The time period within which the entity may investigate whether the specific region has recently expired or will soon expire, and there is no hope of renewal.
● Expenditures for mineral exploration and evaluation are not planned or budgeted for in a specific area.
● The finding of economically feasible amounts of mineral resources has not been fostered by exploration and appraisal of mineral resources in a specific area. This means that the company may stop doing certain things in a certain sector.
Because an organisation may continue to apply its current accounting procedures before implementing IFRS 6, it is possible for it to comply with the standard even if it has not yet implemented IFRS 6. Despite the ongoing development in the particular field, the sum of the research and assessment asset is indeed not worth recovered fully from effective achievement or sale, according to sufficient information.
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